Bypassing the banks can be done, but follow some simple safety precautions
The phrase ‘online money lending’ conjures up unfortunate images of junk emails and dodgy dealers offering untold riches with, of course, massive risks.
But there are ways to lend and borrow money over the internet that are sensible, secure and offer good rates.
One of the best known is Zopa, which links private borrowers and lenders in a marketplace, but there are other interesting organisations offering the chance to lend in a more charitable way.
The big name in online lending is British firm Zopa, which calls itself a ‘peer-to-peer marketplace’. Loans are arranged between individual borrowers and lenders: Zopa provides a mechanism for matching the two and transferring the money, just as Ebay matches buyers and sellers of goods.
If you have money to lend you can open an account, select how much you would like to earn (the site will tell you how likely your money is to be loaned at particular rates) and the site will do the rest.
Borrowers then choose from the rates available – the name comes from the concept of a ‘zone of possible agreement’, where the borrower’s and lender’s rates meet.
Unlike with banks and building societies, lenders are not protected by the Financial Services Compensation Scheme (which offers £50,000 of protection per person if a bank goes bust).
However, because each loan is a contract between two people, they remain in place even if Zopa didn't exist any more. The company has set up a special fund to pay for an agency to administer the contracts in that event.
There are currently half a million members of Zopa in the UK, around 25,000 of whom currently have money on loan – a similar number are currently borrowing. Members have to be 18 to lend and 20 to borrow.
Because loans are made between individuals, there’s always a risk that a borrower will default on a loan.
Zopa works this into its rates: a representative told us that its default rate, the amount of money lost to bad loans, has always been less than one per cent.
At the moment it’s 0.7 per cent. To reduce risk, loans are spread: if you are lending £500 or more it will be spread between at least 50 borrowers.
Over the past 12 months the average annual return on loans has been 8.1 per cent after charges, so taking defaults into account, you could expect to earn 7.4 per cent in a year.
However, it’s important to note that the rate you’ll get will differ depending on your circumstances and how risky you want to be.
A lot of potential borrowers are turned down: around half of all new applicants are rejected based on their credit ratings, and a further quarter are refused based on what Zopa calls ‘affordability criteria’ – salary and outstanding loans.
“If we decrease the number of rejections, the default rate would go up,” the representative said, adding: “At this stage, peer-to-peer lending has to be in the prime area and, even then, in the top end of the prime area.”
More and more people are turning to Zopa: currently just over £1 in every £100 of new loans issued is through Zopa.
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